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Income tax is – perhaps more than any other financial aspect of our lives – emotional. Perhaps more than any other financial aspect of our lives, income tax is emotional. When your CPA tells you that you’re getting a refund, you likely feel joyful and victorious. When you’re told that you owe more tax, on the other hand, you probably feel down and defeated. As you begin to prepare for the 2016 tax season, try to avoid the emotional roller coaster by coming to terms with a couple of misperceptions about tax.
For starters, know that patience is a virtue that the IRS does not have. Rather than paying all taxes due at once, taxpayers must abide by a pay-as-you-go system via paycheck withholdings and/or estimated payments. So, April 15th isn’t really the due date for taxes; it’s more of a “settle up” date. If your withholdings or estimated payments throughout the year are not sufficient to cover the taxes you owe, you will pay more. If paid in excess, you will get a refund.
Ultimately, getting a tax refund is no more a gift than owing more tax is a penalty. Getting excited about a tax refund is a bit like asking someone to hold your wallet and then being ecstatic when they give it back to you. The money was always yours to begin with. A tax refund is just that – a return of your money. Getting down about owing more tax is like being upset that you had to give someone else their wallet back. It was never really yours to spend.
Rather than loaning the government extra money throughout the year, keep control of your funds and consider an automatic savings or investment plan, instead. And, remember, the IRS is impatient and gets angry when it doesn’t get what it wants. Underpaying by a large enough amount can result in an underpayment penalty. Ideally, try to avoid large refunds or underpayments and stay off the emotional tax ride.